<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
Commission file number 0-29907
BLUE ZONE, INC.
(Exact name of registrant as specified in its charter)
NEVADA 86-0863053
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
329 RAILWAY STREET, 5TH FLOOR
VANCOUVER, BRITISH COLUMBIA
CANADA V6A 1A4
(604) 685-4310
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, par value
$0.001 per share, was 22,448,817 on October 27, 2000.
<PAGE> 2
BLUE ZONE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
Three and nine months ended September 30, 2000 and September 30, 1999 4
Consolidated Statement of Stockholders' Equity (Deficiency) -
Nine months ended September 30, 2000 and the year ended
December 31, 1999 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and September 30, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 20
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
BLUE ZONE, INC.
Consolidated Balance Sheets
(Expressed in U.S. dollars)
September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,135,864 $ 4,097,869
Accounts receivable 626,329 97,600
Work-in-progress -- 70,581
Prepaid expenses 37,775 93,204
----------- -----------
4,799,968 4,359,254
Fixed assets, net of accumulated depreciation 847,435 425,596
Deferred finance costs net of accumulated 417,451 --
amortization ----------- -----------
$ 6,064,854 $ 4,784,850
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 173,588 $ 191,675
Accrued liabilities 317,345 178,300
Deferred revenue 79,814 180,143
Payable to stockholders -- 45,559
----------- -----------
570,747 595,677
Redeemable equity securities (note 3) 4,092,600 --
Stockholders' equity:
Common stock, $0.001 par value, authorized 100,000,000 shares;
22,244,817 issued in 2000 and 21,538,100 issued in 1999 21,539 21,538
Additional paid in capital 5,908,680 5,626,371
Deficit (4,357,184) (1,433,831)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (171,528) (24,905)
----------- -----------
1,401,507 4,189,173
----------- -----------
$ 6,064,854 $ 4,784,850
=========== ===========
</TABLE>
Basis of Presentation (note 2)
See accompanying notes to consolidated financial statements
3
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BLUE ZONE, INC.
Consolidated Statement of Operations
(Expressed in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Production and service revenue $ 481,769 $ 43,958 $ 906,574 $ 193,564
Exchange production and service revenue -- 126,851 -- 377,797
----------- ----------- ----------- -----------
481,769 170,809 906,574 571,361
Cost of production and service revenue 197,064 88,910 549,276 193,237
----------- ----------- ----------- -----------
Gross profit 284,705 81,899 357,298 378,124
Operating expenses:
General and administrative 891,595 171,193 2,429,164 242,749
Research and development 197,956 15,182 475,793 33,708
Selling and marketing 1,645 6,872 99,375 11,400
Exchange advertising -- 126,851 -- 377,797
Depreciation 50,244 17,183 141,619 28,565
----------- ----------- ----------- -----------
1,141,440 337,281 3,145,951 694,219
----------- ----------- ----------- -----------
Net loss $ 856,735 $ 255,382 $ 2,788,653 $ 316,095
=========== =========== =========== ===========
Net loss per common share, basic and diluted $ 0.04 $ 0.02 $ 0.13 $ 0.03
----------- ----------- ----------- -----------
Weighted average common shares
outstanding, basic and diluted 21,773,672 12,000,000 21,616,624 12,000,000
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
4
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BLUE ZONE, INC.
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. dollars)
Nine months ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common stock paid-in
Shares Amount Capital
---------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1999 21,538,100 $ 21,538 $ 5,626,371
Issuance of redeemable equity
securities (note 3) 705,467 -- --
Exercise of stock options 1,250 1 6,249
Issuance of stock options -- -- 403,215
Deferred compensation of stock
options -- -- (127,155)
Accretion of premium on redeemable
equity securities (note 3) -- -- --
Amortization of deferred finance
costs (note 3) -- -- --
Net Loss
Cumulative translation adjustment
---------- ----------- -----------
Balance, September 30, 2000 22,244,817 $ 21,539 $ 5,908,680
========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
comprehensive
earning
-----------
Foreign Total
currency stockholders'
Deficit adjustment equity
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1999 $(1,433,831) $ (24,905) $ 4,189,173
Issuance of redeemable equity
securities (note 3) -- -- --
Exercise of stock options -- -- 6,250
Issuance of stock options -- -- 403,215
Deferred compensation of stock
options -- -- (127,155)
Accretion of premium on redeemable
equity securities (note 3) (92,600) -- (92,600)
Amortization of deferred finance
costs (note 3) (42,100) -- (42,100)
Net Loss (2,788,653) (2,788,653)
Cumulative translation adjustment (146,623) (146,623)
----------- ----------- -----------
Balance, September 30, 2000 $(4,357,184) $ (171,528) $ 1,401,507
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
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BLUE ZONE, INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 2000 September 30, 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,788,653) $ (316,095)
Items not involving cash:
Stock based compensation 276,060 --
Depreciation 141,619 28,565
Changes in operating assets and liabilities
Accounts receivable (528,729) --
Work-in-progress 70,581 --
Prepaid expenses 55,429 (9,614)
Accounts payable and accrued liabilities (25,666) 44,608
Deferred revenue (100,329) 43,861
Income taxes payable -- (2,589)
----------- -----------
Net cash used in operating activities (2,899,688) (211,264)
Cash flows from financing activities:
Increase in short term loan -- 1,996,463
Increase in payable to stockholders -- 48,487
Repayment of payable to shareholder (45,559) --
Issuance of redeemable equity securities 4,000,000 --
Increase in deferred finance costs (459,551) --
Issuance of common shares 6,250 --
----------- -----------
Net cash provided by (used in) financing activities 3,501,140 2,044,950
Cash flows from investing activities:
Purchase of fixed assets (563,457) (174,298)
----------- -----------
Net cash used in investing activities (563,457) (174,298)
----------- -----------
Net increase (decrease) in cash and cash equivalents 37,995 1,659,388
Cash and cash equivalents, beginning of period 4,097,869 891
----------- -----------
Cash and cash equivalents, end of period $ 4,135,864 $ 1,660,279
=========== ===========
Supplementary information:
Interest paid $ 488 $ 14,517
Income taxes paid -- 2,589
=========== ===========
Non-cash transactions
Exchange production and service revenue $ -- $ 126,851
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in annual consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed, or omitted,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the Company's opinion, the statements include all adjustments (which are of a
normal and recurring nature) necessary for the fair presentation of the results
of the interim periods presented in accordance with generally accepted
accounting principles for interim financial statements. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 1999, included in the
Company's Form 10 dated March 9, 2000 and amended on May 2, 2000, filed with the
Securities and Exchange Commission. The Company's results of operations for any
interim period are not necessarily indicative of the results of operations for
any other interim period or for a full fiscal year.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
1. BASIS OF PRESENTATION
The financial statements have been prepared on the going concern basis,
which assumes the realization of assets and liquidation of liabilities in the
normal course of business. The application of the going concern basis is
dependent on the Company's ability to obtain additional financing and,
ultimately, attain profitable operations to meet the Company's liabilities and
commitments as they become payable.
2. REVENUE RECOGNITION
The Company generates production and service revenues through the
following sources: strategic consulting services, interactive broadcasting
development and maintenance, and software licensing. Consulting service revenues
are recognized upon delivery of the service. Interactive broadcasting
maintenance is recognized over the term of the contracts, typically month to
month. For long-term development projects, the Company recognizes revenue on a
percentage of completion basis, based upon achievement of specifically
identifiable contractual milestones.
The Company recognizes software licensing revenue over the term of the
license if persuasive evidence of an arrangement exists, collection is probable,
the fee is fixed or determinable, and vendor-specific objective evidence exists
to allocate the total fee to elements of the arrangement. Vendor-specific
objective evidence is typically based on the price charged when an element is
sold separately, or, in the case of an element not yet sold separately, the
price established by authorized management, if it is probable that the price,
once established, will not change before market introduction. Elements included
in multiple element arrangements could consist of software products, upgrades,
enhancements or customer support services.
If a transaction includes both license and service elements, license
fee revenues are recognized over the term of the license, provided services do
not include significant customization or modification of the base product, and
the payment terms for licenses are not subject to acceptance criteria.
Revenue that has been prepaid or invoiced but does not yet qualify for
recognition under our policies is reflected as deferred revenues.
7
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3. REDEEMABLE EQUITY SECURITIES
On September 8, 2000, the Company completed a private placement of its
common stock where it issued 705,467 shares at $7.08 per share for gross
proceeds of $5,000,000 and initial warrants to purchase an additional 148,148
shares at $8.10 per share expiring on September 8, 2003. Of the $5,000,000 in
gross proceeds, $1,000,000 will be paid to the Company once registration of the
related common stock with the Securities and Exchange Commission becomes
effective. In connection with this financing, the Company issued additional
warrants to the investors which entitle them to purchase shares of common stock
at an exercise price of $0.001 per share. The right to purchase additional
shares under the warrants will be determined on eight adjustment dates which
will occur every ninety days for a period of up to two years beginning on
December 7, 2000 assuming effectiveness of the registration of the underlying
securities. If on those eight adjustment dates, the average closing price for a
share of common stock on the ten lowest closing price trading days during the
thirty day period preceding the adjustment date is lower than the closing price
as calculated for the preceding adjustment date or lower than $7.08 for the
first adjustment date, the investors will receive the right to purchase
additional shares or common stock at $0.001 per share. The precise number of
shares of common stock, if any, which may be issued on any of these adjustment
dates shall be determined in accordance with a formula as set forth in the
warrant with the effect of lowering the average price per share issued in the
private placement. In addition, the Company granted a one year option to the
investors to acquire up to an additional $2,000,000 in shares based on
then-prevailing market prices. These options may not be exercised unless the
closing price on the date of exercise is at least $7.08 per share. The Company
is obligated to issue warrants equal to 20% of the shares issued under the
purchase option at an exercise price per share equal to 120% of the purchase
price paid for the shares of common stock under the option.
All of the shares of common stock and shares underlying the option and
the warrants sold in the private placement, including warrants issued upon
exercise of the option, are subject to redemption at the option of the investors
up to May 8, 2001 if the Company's common stock is delisted for more than five
consecutive days or the registration statement is not effective for ten
consecutive days or an aggregate of 30 days during any 12 month period, provided
that the effectiveness of the registration statement containing the prospectus
can be suspended for 30 consecutive days to incorporate the Company's December
31, 2000 financial statements. If the Company is required to redeem the shares
of common stock and shares underlying the options and warrants held by the
investors, the redemption price will be equal to 120% of the exercise price for
those shares received by the investors pursuant to the exercise of the option.
For any shares issued upon exercise of the initial warrants, the option, the
adjustment warrants or any warrants issued upon any exercise of the option, the
redemption price will be 120% of the fair market value of the shares at the time
of redemption or default. For any unexercised initial warrants, adjustment
warrants, options and warrants issued upon any exercise of the options, the
redemption price will be 120% of the fair market value at the time of redemption
or default of the number of shares underlying such securities.
The Company has recorded the $4,000,000 received on the private
placement as redeemable equity securities due to the existence of the redemption
provisions described above. The 20% redemption premium is being recognized over
the period to May 8, 2001 as a charge to retained earnings. The redemption
premium has been adjusted for in determining loss per share.
The deferred finance costs related to the issuance of the redeemable
equity securities are being amortized over the period to May 8, 2001 as a
charge to retained earnings.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Investors should read the following in conjunction with the unaudited
consolidated financial statements of this Quarterly Report, and the audited
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Conditions and Results of Operations for the year
ended December 31, 1999 in our Form 10 dated March 9, 2000.
FORWARD LOOKING STATEMENTS
This filing contains forward-looking statements that are subject to a
number of risks and uncertainties, many of which are beyond our control. Some of
these risks and uncertainties include:
- plans for and ability to hire additional personnel;
- business strategy, including development of our MediaBZ(TM) software;
- expectations for future expansion both in the U.S. and elsewhere;
- anticipated growth in revenue;
- uncertainty regarding our future operating results;
- uncertainty regarding future capital to fund our operations; and
- plans, objectives, expectations and intentions contained in this report
that are not historical facts.
All statements, other than statements of historical fact included in
this report, regarding our strategy, future operations, financial position,
estimated revenues or losses, projected costs, prospects, plans and objectives
of management are forward-looking statements. When used in this registration
statement, the words "will", "believe", "anticipate", "intend", "estimate",
"expect", "project" and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements speak only as of the date
of this report. You should not place undue reliance on these forward-looking
statements. Although we believe that our plans, intentions and expectations
reflected in or suggested by the forward-looking statements we make in this
report are reasonable, we can give no assurance that these plans, intentions or
expectations will be achieved.
OVERVIEW
Blue Zone makes news interactive. We generate revenue from software
licensing, interactive broadcasting content enhancements, creative production
and maintenance services related to interactive broadcasting development and
from consulting services related to Internet strategies. Our business has
historically been focused on providing website design and content services to a
range of Canadian-based media and broadcasting companies, as well as fulfilling
the interactive needs of a group of clients on a project basis.
Bruce Warren and Jamie Ollivier, our Chief Executive Officer and
President, respectively, have worked in the broadcast field for ten years,
during which time they acquired insights into the technology requirements of
traditional television and radio broadcast companies to access the world wide
web, set-
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top-boxes, and other interactive devices. Our experience with live news
delivery, including the variety of video, graphics and editing production
equipment and specific communication standards that exist inside a newsroom
between equipment or employees, enables us to develop software for the unique
needs of the broadcast community. As a consequence, in 1997, Bruce Warren and
Jamie Ollivier began development of proprietary software, now trademarked as the
MediaBZ(TM) suite of products, to facilitate convergence of television, radio,
and print media to the interactive environment.
In the latter half of 1999, we contracted with CTV, Canada's largest
private TV network now held in trust by BCE Inc., to plan, design and implement
CTV News' interactive broadcasts, utilizing the MediaBZ(TM) product. The
interactive news service, CTVNEWS.com, was launched on September 21, 2000. By
utilizing Blue Zone's NewsBZ(TM) software, CTVNEWS.com publishes its content to
the Web, interactive television, WAP enabled cellular telephones, and personal
digital assistants. We have also been retained as an ongoing consultant to CTV.
We have incurred losses in the last three years, and as of September
30, 2000, had an accumulated deficit of $4.26 million. Our net loss for the nine
months ended September 30, 2000 was $2.79 million. Concurrent with our
recapitalization and the commencement of the trading of our stock in October
1999, we began implementing our business plan built on the marketing of the
MediaBz(TM) product line to a broad range of television and radio media
companies. To this end, we substantially augmented our payroll, have leased new
office space and increased our capital budget to provide some of our enlarged
infrastructure needs.
A significant proportion of our reported revenue for the three years
ended December 31, 1999 has been in the form of a barter exchange agreement with
BCTV. This revenue has been offset to Exchange advertising. Under the BCTV
contract, we exchanged our services for airtime rather than receiving a cash
payment. In return for services, we received television airtime, which we
accounted for as advertising expense under the barter exchange agreement. We
used this airtime to enhance our name recognition because we believe it to be
valuable in marketing our products to current and potential clients.
RESULT OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three months and nine months
ended September 30, 2000 and 1999 are not necessarily indicative of the results
that may be expected for the full fiscal year or any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Production and service revenue 100% 26% 100% 34%
Exchange production and service revenue 0% 74% 0% 66%
-------------------------------------------------
100% 100% 100% 100%
Cost of production and service revenues 41% 52% 61% 34%
-------------------------------------------------
Gross profit 59% 48% 39% 66%
Operating expenses
General and administrative 185% 100% 268% 42%
Research and development 41% 9% 52% 6%
Selling and marketing 0% 4% 11% 2%
Exchange advertising 0% 74% 0% 66%
Depreciation 11% 10% 16% 5%
-------------------------------------------------
237% 197% 347% 121%
-------------------------------------------------
Net loss 178% 149% 308% 55%
-------------------------------------------------
</TABLE>
10
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REVENUE
Our total revenue for the third fiscal quarter increased 182% to
$482,000 from $171,000 for the prior-year quarter. Revenue for the nine month
period ended September 30, 2000 were $907,000 compared with $571,000 for the
prior-year nine month period, representing an increase of 59%. CTV accounted for
94% of the revenue for our third quarter compared to nil in the same quarter
last year. In the prior-year third quarter, BCTV accounted for 78% of our
revenue. For the nine months ended September 30, 2000, CTV accounted for 91% of
our revenue compared to nil for the same period last year. In the prior-year
nine month period, BCTV accounted for 71% of revenue. We received no revenue
under barter exchange agreements for the three and nine month periods ended
September 30, 2000 compared to $127,000 and $378,000 for the three and nine
month periods ended September 30, 1999, respectively. This decrease was due to
the completion of our contract on December 31, 1999 with BCTV which was a
three-year website evolution project.
Revenue from our multi-year contract with CTV has been accounted for
under the percentage-of-completion basis, based upon achievement of specifically
identifiable milestones.
COST OF REVENUE
Cost of revenue includes labor, materials and overhead expenses
incurred in the delivery of software and services. Prior to our reorganization
in late 1999, our Chief Executive Officer, Bruce Warren and our President, Jamie
Ollivier, created much of the detailed design and code writing for software and
the bulk of the technical workforce was retained on short-term contracts. With
the signing of the CTV contract, we began to transform our workforce to full
time, permanent employees. As a result, our staffing for production personnel
increased significantly for the nine months ended September 30, 2000 over the
same period last year.
Cost of revenue increased by 122% to $197,000 in the third quarter from
$89,000 for the prior-year quarter. For the nine months ended September 30, 2000
and 1999, respectively, cost of revenue increased by 184% to $549,000 from
$193,000. This increase is mainly attributable to production costs for the CTV
contract. Labor costs for the nine months ended September 30, 2000 increased by
$278,000 over the same period last year. The majority of our production
personnel were hired in the second quarter, which contributed to the increase in
cost of sales. The introduction of new personnel resulted in some inefficiencies
because it took some time for these persons to contribute to capacity.
Associated with the increase in staffing were increased costs in production
overhead and external consultants this year.
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We expect our gross profit to fluctuate based on our product mix,
geographic mix, product and patent licenses, and the uncertain costs associated
with hiring competent technical, creative and management personnel. We cannot
assure you that we will be able to improve our gross margins.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses increased by $720,000 to
$892,000 in the third quarter compared to the prior-year quarter. For the nine
months ended September 30, 2000, these expenses increased by $2.19 million to
$2.43 million from the same period last year.
We doubled our staffing levels in the second quarter over the first
quarter of this year and as a result, our staffing costs increased by $569,000
in the first nine months of this year compared to the same period last year.
Our accounting, legal, and investor relations fees increased to
$654,000 from $22,000 for the nine months ended September 30, 2000 and 1999,
respectively. This increase was primarily due to legal costs associated with the
filing of our Form 10 with the Securities and Exchange Commission and our
successful application for inclusion in the Nasdaq National Market System as
well as increased investor relations activities.
Travel costs increased significantly to $443,000 for the nine months
ended September 30, 2000 compared to $84,000 for the same period last year. Much
of these travel costs were incurred for our new customer marketing and selling
efforts in addition to numerous trips and presentations to potential investors.
Other expenses in the areas of rent, office supplies and telephone
increased by $363,000 for the nine months ended September 30, 2000 over the same
period last year.
We expect that general and administrative expenses will continue to
grow in the future as additional personnel are hired and sales and marketing
expands.
Total general and administrative costs were reduced by $103,000 in
interest income in the first nine months of this year.
RESEARCH AND DEVELOPMENT
Based on the anticipated success of the MediaBZ(TM) suite of software
products and contingent upon our ability to raise additional funds, we expect to
invest funds to improve the existing MediaBZ(TM) products by providing features
and options requested by clients. Research and development costs increased to
$198,000 in the third quarter from $15,000 for the prior-year quarter. For the
nine months ended September 30, 2000, these costs rose to $476,000 from $34,000
for the same period last year. Most of our research and development prior to
becoming a public company was conducted by our President, Jamie Ollivier and
Chief Executive Officer, Bruce Warren. We now have a dedicated team of people in
the research and development group. We cannot guarantee that expenditures in
research and development will ensure our success or lead to innovations that are
not available to our competition.
SELLING AND MARKETING
Our selling and marketing costs decreased to $2,000 in the third
quarter from $7,000 for the prior-year quarter. For the nine months ended
September 30, 2000, these costs increased to $99,000 from
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$11,000 for the same period last year. The preparation of promotional and
marketing material costs accounted for $72,000 of the nine months total costs.
DEPRECIATION
Depreciation has been provided on the declining balance basis using a
30% rate for all capital asset categories, except for leasehold improvements,
which are amortized on a straight-line basis over five years, representing the
terms of the lease. The expense for the third quarter increased to $50,000 from
$17,000 for the same quarter last year. The expense for the nine months ended
September 30, 2000 increased to $142,000 from $29,000 for the same period last
year. Total capital asset purchases were $53,000 and $563,000 for the three and
nine months ended September 30, 2000 respectively, as we continue to build our
technical infrastructure.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our reorganization in October 1999, we had very limited access
to capital, and we depended entirely on our principal stockholder and current
Chairman Michael Warren for direct financing or as guarantor of a line of credit
from recognized financial institutions.
As a result of the $5.25 million private placement in October 1999, we
had working capital of $3.76 million as of December 31, 1999. As a result of the
private placement on September 8, 2000, we had working capital of $4.23 million
as of September 30, 2000. Cash and cash equivalents at September 30, 2000 were
$4.14 million compared to $4.10 million at December 31, 1999. Our surplus cash
is invested in high-grade corporate securities.
During the nine months ended September 30, 2000, we used $2.90 million
in our operating activities compared to $211,000 in the prior-year nine month
period. Non-cash charges relating to stock option compensation and depreciation
were $418,000 for the nine months ended September 30, 2000 compared to $29,000
for the same period last year.
We invested $53,000 and $563,000 in fixed assets for the three and nine
months ended September 30, 2000, respectively, including $9,000 and $53,000 in
leasehold improvements pertaining to our Vancouver and Toronto offices.
On September 8, 2000, we completed a private placement of our common
stock where we issued 705,467 shares at $7.08 per share for gross proceeds of
$5,000,000 and initial warrants to purchase an additional 148,148 shares at
$8.10 per share expiring on September 8, 2003. Of the $5,000,000 in gross
proceeds, $1,000,000 will be paid to us once registration of the related common
stock with the Securities and Exchange Commission becomes effective. In
connection with this financing, we issued additional warrants to the investors
which entitle them to purchase shares of common stock at an exercise price of
$0.001 per share. The right to purchase additional shares under the warrants
will be determined on eight adjustment dates which will occur every ninety days
for a period of up to two years beginning on December 7, 2000 assuming
effectiveness of the registration of the underlying securities. If on those
eight adjustment dates, the average closing price for a share of common stock on
the ten lowest closing price trading days during the thirty day period preceding
the adjustment date is lower than the closing price as calculated for the
preceding adjustment date or lower than $7.08 for the first adjustment date, the
investors will receive the right to purchase additional shares or common stock
at $0.001 per share. The precise number of shares of common stock, if any, which
may be issued on any of these adjustment dates shall be determined in accordance
with a formula as set forth in the warrant with the effect of lowering the
average price per share issued in the private placement. In addition, we granted
a one year option to the investors to acquire up to an additional $2,000,000 in
shares based on then-prevailing market prices. These options may not be
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exercised unless the closing price on the date of exercise is at least $7.08 per
share. The Company is obligated to issue warrants equal to 20% of the shares
issued under the purchase option at an exercise price per share equal to 120% of
the purchase price paid for the shares of common stock under the option.
All of the shares of common stock and shares underlying the option and
the warrants sold in the private placement, including warrants issued upon
exercise of the option, are subject to redemption at the option of the investors
up to May 8, 2001 if the Company's common stock is delisted for more than five
consecutive days or the registration statement is not effective for ten
consecutive days or an aggregate of 30 days during any 12 month period, provided
that the effectiveness of the registration statement containing the prospectus
can be suspended for 30 consecutive days to incorporate the Company's December
31, 2000 financial statements. If the Company is required to redeem the shares
of common stock and shares underlying the options and warrants held by the
investors, the redemption price will be equal to 120% of the exercise price for
those shares received by the investors pursuant to the exercise of the option.
For any shares issued upon exercise of the initial warrants, the option, the
adjustment warrants or any warrants issued upon any exercise of the option, the
redemption price will be 120% of the fair market value of the shares at the time
of redemption or default. For any unexercised initial warrants, adjustment
warrants, options and warrants issued upon any exercise of the options, the
redemption price will be 120% of the fair market value at the time of redemption
or default of the number of shares underlying such securities.
We have recorded the $4,000,000 received on the private placement as
redeemable equity securities due to the existence of the redemption provisions
described above. The 20% redemption premium is being recognized over the period
to May 8, 2001 as a charge to retained earnings. The redemption premium has been
adjusted for in determining loss per share.
The deferred finance costs related to the issuance of the redeemable
equity securities are being amortized over the period to May 8, 2001 as a charge
to retained earnings.
We believe we have sufficient liquidity on hand to finance
our operations through to the end of fiscal 2001. We are, however, currently
dependent on the CTV contract for our revenue.
Our future capital requirements will, however, depend on a number of
factors, including costs associated with product development efforts, the
success of the commercial introduction of our products and the possible
acquisition of complementary businesses, products and technologies. To the
extent additional capital is required, we may sell additional equity, debt or
convertible securities or establish credit facilities. We cannot assume that
additional capital will be available when we need it on terms that we consider
acceptable.
INCOME TAXES
No taxes are payable for the three and nine months ended September 30,
2000 and 1999, as a result of the operating losses recorded. Based on a number
of factors, including the lack of a history of profits, we believe there is
sufficient uncertainty regarding the realization of deferred tax assets, and
have not booked an income tax benefit. These losses can be carried forward for
seven years.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, we had not entered into or acquired financial
instruments that have material market risk. We have no financial instruments for
trading or other purposes or derivative or other financial instruments with off
balance sheet risk. All financial assets and liabilities are due within the next
twelve months and are classified as current assets or liabilities in the
consolidated balance sheet included in this Report. The fair value of all
financial instruments at September 30, 2000 is not materially different from
their carrying value.
We regularly invest funds in excess of our immediate needs in
guaranteed investment certificates issued by major Canadian banks or high-grade
corporate debt securities. The fair value of these instruments, which generally
have a term to maturity of 90 days or less, does not differ significantly from
their face value.
To September 30, 2000, substantially all revenues and the majority of
cash costs have been realized or incurred in Canadian dollars. To date we have
not entered into foreign currency contracts to hedge against foreign currency
risks between the Canadian dollar or other foreign currencies and our reporting
currency, the United States dollar. Generally, however, we attempt to manage our
risk of exchange rate fluctuations by maintaining sufficient net assets in
Canadian dollars to retire our liabilities as they come due.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 8, 2000, we completed a private placement with Millennium
Partners LP, Elliott Associates, L.P. and Westgate International, L.P. in
reliance on Section 4(2) of the Securities Act of 1933, as amended, regarding
transactions by an issuer not involving a public offering, in that the
transactions were made, without general solicitation or advertising, to
sophisticated investors with access to all relevant information necessary to
evaluate this investment and who represented to us that the securities were
being acquired for investment. At closing, we received gross proceeds of
$4,000,000 from the investors for which we sold 705,467 shares of our common
stock, initial warrants exercisable for 148,148 shares of our common stock at
$8.10 per share expiring September 8, 2003, an option exercisable at then
prevailing market prices, but no less than $7.08, for one year to acquire up to
$2,000,000 of our common stock and warrants, and adjustment warrants which could
entitle the investors to a significant number of shares of our common stock, if
our stock price declines and remains below $7.08 per share. We will receive an
additional $1,000,000 when a registration statement covering the securities sold
to the investors is declared effective by the Securities and Exchange
Commission.
In connection with the private placement, we paid commissions and fees
of $335,000 and issued a warrant in reliance on Section 4(2) of the Securities
Act of 1933 to acquire 28,249 shares, exercisable at $8.10 per share, to
Ladenburg Thalmann which acted as a broker in connection with the private
placement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on September 21, 2000. The
14,910,078 shares of Common Stock present at the Annual Meeting out of a then
total of 21,538,100 shares outstanding and entitled to vote acted as follows
with respect to the following proposals:
(1) 14,907,315 votes were cast in favor of the election of Bruce Warren
as a Director, 0 votes were cast against, holders of 2,763 shares indicated that
they abstained from voting on this matter and holders of 0 shares represented at
the meeting for other purposes indicated no response on this item;
(2) 14,907,315 votes were cast in favor of the election of F. Michael P. Warren
as a Director, 0 votes were cast against, holders of 2,763 shares indicated that
they abstained from voting on this matter and holders of 0 shares represented at
the meeting for other purposes indicated no response on this item;
(3) 14,907,315 votes were cast in favor of the election of Jaime Ollivier as a
Director, 0 votes were cast against, holders of 2,763 shares indicated that they
abstained from voting on this matter and holders of 0 shares represented at the
meeting for other purposes indicated no response on this item; (4) 14,907,315
votes were cast in favor of the election of Tryon Williams as a Director, 0
votes were cast against, holders of 2,763 shares indicated that they abstained
from
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voting on this matter and holders of 0 shares represented at the meeting for
other purposes indicated no response on this item; (5) 14,907,315 votes were
cast in favor of the election of David Thomas as a Director, 0 votes were cast
against, holders of 2,763 shares indicated that they abstained from voting on
this matter and holders of 0 shares represented at the meeting for other
purposes indicated no response on this item and (6) 14,907,315 votes were cast
in favor of the election of Jay Shecter as a Director, 0 votes were cast
against, holders of 2,763 shares indicated that they abstained from voting on
this matter and holders of 0 shares represented at the meeting for other
purposes indicated no response on this item.
12,203,192 votes were cast in favor of the ratification of the adoption
of our 1999 Stock Option Plan, 28,017 votes were cast against this matter,
holders of 5,270 shares indicated that they abstained from voting on this matter
and holders of 2,673,599 shares represented at the meeting for other purposes
indicated no response on this item.
14,884,596 votes were cast in favor of the amendment to our 1999 Stock
Option Plan to ensure compliance with Section 162(m) of the Internal Revenue
Code of 1986, as amended, 19,782 votes were cast against this matter, holders of
4,700 shares indicated that they abstained from voting on this matter and
holders of 1,000 shares represented at the meeting for other purposes indicated
no response on this item.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission.
Exhibit No. Description
----------- -----------
2.1 Share Exchange Agreement, dated as of October 5, 1999, among
F. Michael P. Warren, Bruce Warren, Jamie Ollivier, Blue
Zone Productions Ltd., Blue Zone Entertainment Inc., Blue
Zone International Inc. and Western Food Distributors, Inc.
(incorporated by reference to Exhibit 2.1 of our
Registration Statement on Form 10 (File No. 0-29907))
3.1 Registrant's Articles of Incorporation dated March 10,
1997 (incorporated by reference to Exhibit 3.1 of our
Registration Statement on Form 10 (File No. 0-29907)).
3.2 Certificate of Amendment to the Registrant's Articles of
Incorporation, dated July 14, 1998, providing for a 5-for-1
stock split of all of the Registrant's outstanding common
stock (incorporated by reference to Exhibit 3.2 of our
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Exhibit No. Description
----------- -----------
Registration Statement on Form 10 (File No. 0-29907)).
3.3 Certificate of Amendment to the Registrant's Certificate of
Incorporation, dated September 28, 1999, changing the name
of the Registrant to "Blue Zone, Inc." and providing for a
1.125-for-1 stock split of all of the Registrant's issued
and outstanding common stock (incorporated by reference to
Exhibit 3.3 of our Registration Statement on Form 10 (File
No. 0-29907)).
3.4 Bylaws (incorporated by reference to Exhibit 3.4 of our
Registration Statement on Form 10 (File No. 0-29907)).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of our Registration Statement on Form 10
(File No. 0-29907)).
4.2 Warrant to Purchase 524,981 shares of common stock of Blue
Zone, Inc., dated October 1, 1999, issued to Savoy Holdings
Limited (incorporated by reference to Exhibit 4.2 of our
Registration Statement on Form 10 (File No. 0-29907)).
4.3 Form of Initial Warrant, dated September 8, 2000 (filed as
an exhibit to the Company's Current Report on Form 8-K dated
September 20, 2000, and incorporated herein by reference).
4.5 Form of Adjustment Warrant, dated September 8, 2000 (filed
as an exhibit to the Company's Current Report on Form 8-K
dated September 20, 2000, and incorporated herein by
reference).
4.5 Form of Option to Purchase Common Stock, dated September 8,
2000 (filed as an exhibit to the Company's Current Report
on Form 8-K dated September 20, 2000, and incorporated
herein by reference).
10.4 Business Banking Loan Agreement, dated July 9, 1999, between
Blue Zone Productions Ltd. and Royal Bank of Canada
(incorporated by reference to Exhibit 10.4 of our
Registration Statement on Form 10 (File No. 0-29907)).
10.5 Guarantee and Postponement of Claim, dated July 9, 1999,
executed by F. Michael P. Warren in favor of Royal Bank of
Canada (incorporated by reference to Exhibit 10.5 of our
Registration Statement on Form 10 (File No. 0-29907)).
10.6 Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Jamie Ollivier (incorporated by
reference to Exhibit 10.6 of our Registration Statement on
Form 10 (File No. 0-29907)).
10.7 Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Bruce Warren (incorporated by
reference to Exhibit 10.7 of our Registration Statement on
Form 10 (File No. 0-29907)).
10.8 Employment Agreement, dated January 1, 2000, between Blue
Zone Entertainment Inc. and Catherine Warren (incorporated
by reference to
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Exhibit No. Description
----------- -----------
Exhibit 10.8 of our Registration Statement on Form 10 (File
No. 0-29907)).
10.9 1999 Stock Option Plan (incorporated by reference to Exhibit
10.9 of our Registration Statement on Form 10 (File No.
0-29907)).
10.10 Subscription Agreement, dated as of September 22, 1999,
between Savoy Holdings Limited and Western Food
Distributors, Inc. for private placement of common stock and
stock purchase warrants (incorporated by reference to
Exhibit 10.10 of our Registration Statement on Form 10 (File
No. 0-29907)).
16.1 Letter regarding change in certifying accountant
(incorporated by reference to Exhibit 16.1 of our
Registration Statement on Form 10 (File No. 0-29907)).
27.1 Financial Data Schedule for fiscal quarter ended September
30, 2000
* Confidential treatment has been requested with respect to certain portions of
the Exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
(b) REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K on September 20, 2000 in
connection with the completion of our private placement on September 8, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLUE ZONE, INC.
Date: October 30, 2000 By:/s/ Bruce Warren
-------------------------------
Bruce Warren
Chief Executive Officer
(Principal executive and
accounting officer)
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